Oil Bust Takes Its Toll On Latin-American Oil Output

U.S. shale continues to inch down each week – the EIA’s latest weekly estimate shows a decline of 16,000 barrels per day in the last week of March, lowering U.S. output to 9.022 million barrels per day (mb/d).

However, more and more declines are beginning to emerge from around the world. Previously, we have touched on the outages in Nigeria – a loss of around 300,000 barrels per day from a bombed pipeline in February – as well as the disruptions in Iraq, which lost about 210,000 barrels per day in February, also from pipeline problems.

Looking elsewhere, Latin America could see substantial declines in production this year as low oil prices lead to austerity and severe cuts in investment, according to a Reuters analysis.

"Latin America is among the world's most vulnerable oil regions right now," Robert Campbell from Energy Aspects told Reuters. "We are expecting an exports decline of at least 100,000 barrels per day in the second quarter and possibly as much as 200,000 bpd compared with the same period of 2015."

That could be a conservative estimate, although solid data is sometimes hard to come by. Thomson Reuters Trade Flows data shows that Venezuela’s crude exports likely fell by about 300,000 barrels per day in March compared to a year earlier, dropping to 1.64 mb/d. Venezuela’s state-owned oil company PDVSA did not comment on the data and insists that exports are at normal levels. Related: Impatient Banks: A Real Red Flag For The Oil Patch

Despite having the largest oil reserves in the world, Venezuela’s oil production could continue to fall as its economy melts down. Its production has been stagnant for a decade, and the lack of upstream investment will mean that oilfield production continues to gradually erode. The IMF expects Venezuela’s economy to shrink by as much as 6 percent this year following a 10 percent contraction last year.

Brazil has managed to increase production since the discovery of its gargantuan pre-salt oil fields a decade ago. However, the results have trailed expectations, and the gains could be set to halt as state-owned Petrobras – the most indebted oil company in the world – has sharply reduced investment. Energy Aspects, as reported by Reuters, expects that Brazil will see production declines at some of its oil fields in 2016. Some maintenance projects will finish up, bringing some production back online, but Brazil’s oil field depletion will keep exports flat this year rather than rising, as previous estimates expected.

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Smaller outages are also taking place in Peru, where a ruptured pipeline has apparently cut off nearly 10,000 barrels per day. The pipeline could remain offline for another two months.

Larger problems are taking place in Mexico, which is not suffering from attacks on facilities, but is facing serious depletion at its aging oil fields. Mexico’s output has been falling for more than a decade, a fact that pushed the government to open up the industry and privatize assets in hopes of arresting decline. The auctions are proceeding but have been staged during the worst oil price downturn in decades, scaring away international companies and their large pocketbooks.

Low oil prices have hollowed out Pemex, just as it has for other oil companies. Moody’s just downgraded Pemex’s credit rating to Baa3, the lowest investment grade rating. It also cut Mexico’s sovereign rating outlook to negative. Pemex has had to cut spending by $5.5 billion in order to stop the bleeding. However, the move could result in Pemex losing another 100,000 barrels per day in production this year, which could fall to 2.13 mb/d.

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Some of these outages are temporary, others more permanent. But while the energy world pays close attention to weekly figures from the EIA on the status of the U.S. shale decline, Latin America is also losing quite a bit of production from the collapse in oil prices.

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Saudi will hold steady with current strategy in the event there are any output gaps to fill in the near term. They can't afford to allow prices to rally beyond the $40-50 range, and risk a re-entry of US Shale or any other high cost production over the medium to long term